Economy

IMF offers Sri Lanka provisional $2.9bn loan to tackle debt crisis | Sri Lanka

The International Monetary Fund has tentatively offered Sri Lanka a $2.9bn (£2.5bn) loan to help the country recover from the worst economic crisis since it gained independence from Britain in 1948.

The funding is meant to provide some breathing space for Sri Lanka, which is scrambling to restructure nearly $30bn in debt to creditors including China, India and a string of international banks.

Sri Lanka defaulted on its foreign debts for the first time in its history in May. The country has been grappling with soaring inflation that recently rose past 64%, as well as food, fuel and medicine shortages that led to nationwide protests in the spring.

Those demonstrations resulted in fatal clashes on the streets of Colombo and triggered the resignation of Mahinda Rajapaksa as prime minister.

Sri Lanka’s economy has suffered as a result of the Covid pandemic, which caused a collapse in tourism. That triggered a drop in foreign currency income and rising debt levels – a situation made worse by the surge in global commodity prices due to the war in Ukraine.

The agreement with the IMF still needs to be approved by the Washington-based fund’s leadership, and hinges on Sri Lanka following through on a range of previously agreed measures.

“The staff-level agreement is only the beginning of a long road for Sri Lanka,” the senior IMF official Peter Breuer told reporters in Colombo, according to Reuters. “Authorities have already begun the reform process and it must continue with determination.”

Sri Lankan authorities will have to commit to a four-year programme involving significant tax changes, including broadening the scope of corporate income tax and VAT, and making personal income taxes more progressive.

The programme is also meant to give greater independence to Sri Lanka’s central bank, introduce new fuel and electricity tariffs, increase spending on social projects and rebuild its depleted foreign currency reserves.

However, the country still needs to strike deals with international banks and asset managers that hold the bulk of its $19bn in sovereign bonds, which are now in default.

Japan has offered to lead talks with Sri Lanka’s other main creditors, including India and China, the latter of which has invested in the country as part of its belt and road initiative.

Beijing’s project, which is often described as a 21st-century silk road, has allowed China to extend its international influence by investing in more than 70 countries, including Sri Lanka. It has helped countries in Asia, Africa and eastern Europe build railways and ports that connect to China, but often results in governments becoming heavily indebted to Beijing.

There are growing concerns across the developing world regarding China’s approach to debt defaults, and Beijing is widely expected to seek preferential treatment in negotiations with Sri Lanka.

“If creditors are not willing to provide assurances, it would deepen Sri Lanka’s crisis and undermine repayment capacity,” Breuer said, according to reports, with the IMF official adding it was in the interest of all creditors to collaborate.

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